Hong Kong Offshore Tax Exemption: How to Claim Offshore Profits

Key Takeaways

• Hong Kong offers tax exemption on profits derived outside Hong Kong.
• In determining where the profits are derived, the Inland Revenue Department applies a series of checks, reviewing each offshore tax exemption claim individually
• The new Foreign-sourced Income Exemption regime may make multinational entities taxable on dividends, interest, IP income, and disposal gains derived outside Hong Kong but received in the jurisdiction, unless they qualify for an exemption.
• An offshore profit claim needs to be made every year in a profits tax return and substantiated by evidence showing that the profits were obtained outside of Hong Kong.

How Does Hong Kong’s Tax System Work?

Hong Kong has long used only a territorial basis for taxation until the introduction of the FSIE regime by the Inland Revenue (Amendment) (Taxation on Specified Foreign-sourced Income) Ordinance. While the FSIE regime restricts possibilities for multinational companies (MNEs) to use Hong Kong tax exemptions, the changes generally do not apply to Hong Kong companies without overseas related entities.

According to the territorial basis, Hong Kong imposes tax on assessable income or profits that are derived in Hong Kong by persons or companies carrying on a trade, profession or business in Hong Kong unless they qualify under an exemption. For now, Hong Kong does not impose value-added tax, as well as sales, turnover or payroll taxes, while dividends and disposal gains may be taxable for MNEs when received in Hong Kong. The favourable tax treatment and business-friendly policies in Hong Kong contributed to continuous growth of the number of locally registered companies, reaching an all-time high of 1,557,103 entities according to statistics released by the Companies Registry in January 2026.

How Does Hong Kong Offshore Tax Exemption Work?

Hong Kong offshore tax exemption is the practical outcome of its territorial tax system, which presumes that when company’s profits are derived outside the jurisdiction, the corresponding profits tax generally does not apply. If the multinational entity receives passive income in the form of dividends, interest, intellectual property income, or gains from disposal of assets, separate rules under the Foreign-sourced Income Exemption (FSIE) regime would apply.

In determining whether the profit is derived in Hong Kong, the Inland Revenue Department (IRD) applies a set of criteria, defined in Departmental Interpretation and Practice Note No. 21 (DIPN 21). Specifically, the IRD holds that the concept of carrying on a business in Hong Kong is generally broader than the definition of permanent establishment provided by the Inland Revenue Ordinance (IRO).

How Hong Kong Determines Where the Profits Are Derived

In deciding whether the company derives an income or profit in Hong Kong, the following checks are generally applied:

• Matter of Fact: When considering where the profits are generated, the IRD accounts for the nature of the profits and transactions that gave rise to such profits.
• Operations Test: This approach includes identifying operations which produced relevant profits and ascertaining where those operations took place.
• Antecedent or Incidental Activities: This principle separates profit-producing transactions from antecedent or incidental activities.
• Place Where Decisions Are Made: While usually not a deciding factor, the place where the business decisions are made is considered among other factors in determining the source of profits.
• Gross Profits From Transactions: Under this principle, each individual transaction is viewed separately on its own, assessing where the gross profit was generated.
• Overseas Business Presence: The absence of business presence overseas does not imply, by itself, that all profits of a Hong Kong business arise or are derived from Hong Kong.

No single factor decides a claim. The IRD weighs them together, and the combination below is what a well-evidenced offshore claim looks like:

Requirement	Offshore Claim
Contracts signed offshore	Yes
Negotiation offshore	Yes
Staff offshore	Yes
Shipping offshore	Yes
Bank account	Helpful but insufficient

 

What Is Foreign-Sourced Income Exemption (FSIE)?

On 1 January 2023, a new Foreign-sourced Income Exemption (FSIE) regime came into effect. Applicable to Multinational Enterprise (MNE) Entities, this regime provides that foreign-sourced income, including dividends, interest, IP income, and disposal gains (on any property since 2024) received in Hong Kong is taxable unless qualifying for an exception.

The FSIE exemption applies if economic substance, participation, or nexus requirements (as applicable) are met. Meanwhile, a Hong Kong company which is not an MNE entity will generally fall outside the scope of the FSIE regime.

Offshore and Onshore Profits at a Glance

The table below summarises how the most common profit types are generally treated:

Offshore profits	Taxation
Goods sold outside HK	Usually exempt
Consulting outside HK	Usually exempt
Services performed in HK	Usually taxable
HK office activities	Usually taxable
Overseas dividends (MNE)	Depends on FSIE
IP income	Depends on nexus

 

Who Can Benefit from Hong Kong Tax Exemption?

Despite recent amendments to its taxation system introduced in 2023, Hong Kong remains a highly attractive offshore jurisdiction for:

• trading and export-import companies that carry out their operations outside Hong Kong,
• consulting and professional service firms whose teams work entirely outside of Hong Kong,
• e-commerce and digital businesses selling outside of Hong Kong that do not maintain local staff or warehousing,
• holding and investment structures eligible for a FSIE exemption.

 

When Hong Kong Is Not the Right Choice for Offshore Company Formation

Although Hong Kong remains an attractive jurisdiction for offshore company formation for many business owners, it may not be the right fit for every case. If your operations, staff, or decision-making are located in Hong Kong, in the general case the local profits tax may apply.

At the same time, Hong Kong entities with limited offshore activity or footprint, such as overseas staff or operations, may struggle to substantiate their offshore profit claim. In these scenarios, accepting Hong Kong’s onshore taxes or choosing another jurisdiction could be more sustainable options.

 

How to Prepare a Strong Offshore Profits Claim?

Companies wishing to obtain an offshore tax exemption in Hong Kong need to substantiate their claim when filing their profits tax return. Businesses claiming tax exemption need to demonstrate that the related activities were carried out outside of Hong Kong by providing:

• a completed profits tax return, splitting the profits into onshore and offshore, if the company derives income from a combination of sources or where part of the operations was performed in Hong Kong,
• an auditor’s report, together with supporting documentation such as bank statements, contracts and invoices, and shipping documents,
• computation claiming tax exemption.

When the IRD reviews the exemption claim, it may require additional documents that demonstrate that the relevant transactions and activities were carried out outside of Hong Kong. These documents may include:

• communication logs, including emails or messages that demonstrate where the contracts were negotiated and signed,
• purchase orders and sales documents to demonstrate where the underlying transactions were negotiated and concluded,
• travel documents and visa stamps to confirm physical movement of directors.

 

Common Mistakes in Building an Offshore Tax Claim

Although Hong Kong offshore tax exemption can be available in multiple scenarios, it does not arise out of paperwork alone and requires meeting specific criteria. With new legislation in place, an offshore claim to the IRD can no longer rely solely on an offshore bank account or a foreign customer list. Generally, a company having no real overseas footprint cannot reasonably expect its offshore claim to be accepted.

Other common mistakes in making an offshore profit claim in Hong Kong include:

• trading with Hong Kong entities without documenting that the actual sale, including negotiation, contracting, and performance, happened offshore,
• having the contracts approved in Hong Kong even though the rest of the transaction happened offshore,
• having no overseas staff or representatives who performed the work outside Hong Kong,
• overlooking the FSIE regime for dividends, interest, IP rights, or disposal gains.

 

How to Structure Your Business Under the FSIE Rules

After the introduction of the Foreign-sourced Income Exemption, Multinational Enterprise Entities obtaining foreign-sourced income in the form of dividends, interest, IP income, and disposal gains in Hong Kong are deemed to have derived this income in Hong Kong unless they qualify for an exemption.

To stay exempt, the companies may choose either of the following routes.

Demonstrate Economic Substance

MNEs obtaining foreign-sourced passive income in the form of interest, IP income, dividends, or disposal gains not covered by participation exemption need to demonstrate economic substance to apply for a tax exemption.

Participation Exemption

Those obtaining dividends and disposal gains on equity interest need to demonstrate holding at least 5% of the relevant equity continuously for 12 months or more.

Nexus Approach

Companies choosing this route for their IP income need to demonstrate the portion of their R&D expenditure incurred in Hong Kong.

What Tax Rates Apply to Onshore Profits?

When offshore exemption does not apply, Hong Kong entities pay taxes under a two-tiered system.

For sole proprietorships and partnerships viewed as unincorporated businesses, the tax rate is 7.5% for the first HKD 2 million of profits and 15% for the amounts exceeding this threshold. Private and public limited companies incorporated in Hong Kong pay the tax at 8.25% for the first HKD 2 million of profits and 16.5% applicable to profits exceeding this amount.

How Does a New Global Minimum Tax Work in Hong Kong?

Since 2025, Hong Kong has implemented the OECD’s Pillar Two framework, introducing the Hong Kong Minimum Top-up Tax (HKMTT). The new tax rules impose a 15% minimum tax on Hong Kong entities belonging to multinational groups with a consolidated group revenue of €750 million or more in at least two of the preceding four years. Those companies which do not exceed this threshold and are not eligible for an offshore tax exemption in Hong Kong pay the tax under the two-tiered tax system.

How to Maintain Hong Kong Offshore Status

Having an offshore tax exemption in Hong Kong is not a one-time approval and requires filing an offshore tax exemption claim regularly to maintain the exempt status. Once accepted, the offshore tax exemption in Hong Kong is in practice revisited with updated evidence around every three years, although the underlying claim must be filed annually.

After a company files its profits tax return, the IRD in our experience issues an inquiry letter within six to eight weeks, sometimes in several rounds. That said, the IRD offers an advance ruling for a fee of HKD 45,000, which covers up to 23 hours of IRD time, with further hours billed at HKD 1,730-2,650 which could be useful for larger or complex cases.

Why Work with a Professional Service Provider for Hong Kong Tax Exemption

While it is absolutely possible to file for Hong Kong tax exemption on your own, engaging a professional service provider can help support your claim. An offshore service provider can help substantiate an offshore profit claim in Hong Kong by reviewing the individual circumstances in your case, assist with effective corporate structuring, and ensure accurate documentation. For more information or additional assistance for offshore tax exemption in Hong Kong, please don’t hesitate to contact the Astra Trust team for a personalised consultation.

 

Legislation

Inland Revenue Ordinance (Cap. 112) (HK). https://www.elegislation.gov.hk/hk/cap112

Inland Revenue (Amendment) (Taxation on Specified Foreign-sourced Income) Ordinance 2022 (HK), enacted 23 December 2022, in operation 1 January 2023.

Inland Revenue (Amendment) (Taxation on Foreign-sourced Disposal Gains) Ordinance 2023 (HK), enacted 8 December 2023, in operation 1 January 2024.

Inland Revenue (Amendment) (Minimum Tax for Multinational Enterprise Groups) Ordinance 2025 (HK), enacted 6 June 2025, inserting Part 4AA and Schedules 61–64 into the Inland Revenue Ordinance (Cap. 112).

Departmental Guidance and Official Sources

Inland Revenue Department, Departmental Interpretation and Practice Notes No. 21 (Revised): Locality of Profits. https://www.ird.gov.hk/eng/pdf/dipn21.pdf

Inland Revenue Department, ‘Profits Tax: Source of Profits’. https://www.ird.gov.hk/eng/paf/bus_pft_tsp.htm

Inland Revenue Department, ‘Profits Tax’ (two-tiered rates). https://www.ird.gov.hk/eng/tax/bus_pft.htm

Inland Revenue Department, ‘Foreign-sourced Income Exemption’. https://www.ird.gov.hk/eng/tax/bus_fsie.htm

Inland Revenue Department, ‘Global Minimum Tax and Hong Kong Minimum Top-up Tax for Multinational Enterprise Groups’. https://www.ird.gov.hk/eng/tax/bus_beps.htm

Inland Revenue Department, ‘Advance Rulings’. https://www.ird.gov.hk/eng/pol/aru.htm

Companies Registry, press release (16 January 2026). https://www.cr.gov.hk/en/publications/news-press/press/20260116.htm

GovHK, ‘Objections and Appeals’. https://www.gov.hk/en/residents/taxes/taxfiling/object/objections.htm

 

Disclaimer

This article is general information on Hong Kong law as at the date of publication. It is not legal or tax advice. Whether an offshore profits claim succeeds depends on the facts of each case, and nothing here is an assurance that the Inland Revenue Department will accept a claim. If you are taxable outside Hong Kong, other rules may apply to you. Reading this article does not create a client relationship with Astra Trust. Please take professional advice before acting.